Property market update: Melbourne, August 2018

Property market update: Melbourne, August 2018

Much like in Sydney, the property market Melbourne has been in a slump for the past months, witnessing consistent dwelling value declines and weak returns on investment. Can the capital city recover from this downward trend?

Property value

During the last week of August, no capital city recorded a rise in value. Dwelling values in Melbourne, Sydney and Brisbane held steady while PerthPerth, TASPerth, WA and Adelaide declined by 0.2 per cent and 0.1 per cent, respectively.

Asking prices for both houses and units had also been mostly down in each capital city, with Melbourne experiencing a 1.2 per cent drop over the month.

Overall returns in capital cities have also been declining over the last 12 months. While value growth and capital gains were generally stronger than rental returns, total returns from residential real estate investments remained down in the past year.

According to CoreLogic’s Cameron Kusher: “With dwelling values now falling and gross rental yields close to historic lows, the total returns from residential housing are not looking so attractive and a greater share of returns are coming from the yield component.

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Total annual returns across Australia over the past year declined to 1.9 per cent, the lowest record since June 2012. Returns for capital cities combined were at 0.8 per cent, a stark difference from the previous year’s 14.8 per cent.

Returns for Melbourne, in particular, were at 2.4 per cent, the weakest result since 2012. Regional Victoria, meanwhile, recorded returns at 9.8 per cent, declining from the previous year’s 10.4 per cent.

The Housing Industry Association’s Tim Reardon: “The fall in house prices will dampen demand for new housing over the next 12 months. Add to this, the proliferation of punitive taxes on investors in the housing market, disincentives to overseas buyers and tighter oversight of mortgage lending for home purchases and the environment for residential building is facing significant challenges.”

The property expert expects the housing market to cool over the next couple of years, but the downward trend that has emerged in certain segments of the market will become moderate.

Supply and demand

Despite lackluster returns, the supply and demand for dwelling in Melbourne remained slightly higher than other capital cities.

While listings are down in most capital cities, Melbourne saw the largest increase at 16.3 per cent to 37,671 listings in August, followed by Sydney at 10.9 per cent to 36,011 listings and Canberra at 10.7 per cent to 3,998 listings.

The capital city also performed better than most in terms of housing and unit sales, with only an average of 33 days in the market. The only other markets with better performances are Hobart and Canberra.

Vendor discounting was between 5.1 per cent to 7.1 per cent for houses and between 5.2 per cent and 9.6 per cent for units.

Rental market

Rental vacancy rates in metropolitan Melbourne also hit its lowest point in August, according to the Real Estate Institute of Victoria (REIV). At 1.9 per cent, this has been the lowest record since REIV began collecting data in October 2002.

The current vacancy rate in the capital city, which is a far cry from the 'healthy' 3 per cent, could be a sign of an imbalance in supply and demand, according to REIV president Richard Simpson.

This trend, influenced by population growth, lifestyle trends and property price increase, is likely to result in increased competition for rental properties and, thus, higher rents over time.

He said: “These record low figures coincide with the Victorian government’s introduction of proposed changes to the Residential Tenancies Act which strip away landlords’ rights to control what happens with their investment property.

“The bill, which is currently before the parliament, is likely to result in increased competition for rental properties, greater screening of tenants and will place more pressure on rents if it is passed in its current form,” the property expert added.

Inner Melbourne’s vacancy rate was at 1.8 per cent, while Middle Melbourne and outer Melbourne’s vacancy rates sit at 2.5 per cent and 1.6 per cent, respectively.

While it could add negative pressure on renters, the increased demand for rental properties may bode well for investors in the capital city.

Mr Simpson highlighted: “While the availability of rental stock is at a record low, the cost of renting a home has risen in most areas. With Victoria’s fast-growing population and financial institutions restricting lending to investors, we cannot see the situation improving for renters in the short to medium term.”

Unit supply

At the moment, housing stocks in Melbourne may not be able to satisfy demand completely, but the number of new units in the pipeline is expected to bring back the balance in supply and demand across the capital city.

In the next 12 months, more than 94,000 new units are expected to be completed nationwide, increasing the stock by 3.5 per cent. Over the next two years, the total number of new units is expected to be at 251,751, increasing the stock by 9.3 per cent.

Melbourne will account for the highest number of new units in Australia, with more than 78,000 units to be completed over the next two years.

While this could mean that demand for dwelling could be met, the capital city may also be at risk of oversupply, CoreLogic’s Cameron Kusher said. The condition in Melbourne could further deteriorate if home value and rental growth continue to decline.

Mr Kusher explained: “Considering that dwelling values have generally trended lower over the past twelve months, buyers who have purchased a unit ‘off the plan’ may find the unit value at the time of settlement is lower than what they may have expected at the time of signing the contract.”

“In some cases, the settlement value may be lower than the contract price, implying buyers may need to top up their deposit in order to meet their lenders' loan to valuation requirements,” he added.

Premium properties

While falling values are far from good news for investors, they have opened new opportunities for those who want to purchase exclusive properties for lower prices.

The number of sales for properties selling for at least $1 million declined by 0.8 per cent over the 2017-18 financial year. This trend is expected to continue through the near future, Mr Kusher said.

According to him: “With dwelling values declining and much more rapid declines across the most expensive housing stock it is reasonable to expect the share of $1 million sales to trend lower over the coming year. This will largely be driven by weakening in Sydney and Melbourne.”

Melbourne saw three in 10 houses sold for at least $1 million in the last financial year, or 29.6 per cent, which is a decline from March 2018’ peak of 30.6 per cent.

Meanwhile, only 8 per cent of units in the capital city sold for $1 million or above, declining from last year’s 8.1 per cent.

Affordable properties

The falling value of exclusive properties does not necessarily mean an increase in property bargains.

In fact, across the country, the volume of sales for houses under $400,000 feel by 1.5 per cent to 29.2 per cent, while the volume of sales for units in the same price bracket fell by 0.8 per cent to 34.6 per cent.

Across capital cities, the number of available houses priced under $400,000 is currently only 13.9 per cent of all stock, which is a historic low. The number of available units in the same price bracket is down by 16.2 per cent to 25.8 per cent of all stock.

This decline in the supply of affordable properties is an indication of the softening of Sydney and Melbourne, which were once the top property markets in Australia, according to Mr Kusher.

“However, should it continue for a number of years we may finally see a reversal of the declining trend in sales under $400,000,” he said.

In Melbourne, only 2.7 per cent of available houses are priced under $400,000, down from last year’s 9.5 per cent. The available units in the same price bracket account for only 21.5 per cent of all stocks, down from last year’s 28 per cent.

Regional areas, meanwhile, are faring much better, with 49.6 per cent of available houses and 57.3 per cent of available units priced $400,000 or below.

Growth drivers

Despite the downward trend in the Melbourne property market, experts believe that the capital city is far from any drastic market crashes because of its strong economy as well as the presence of significant growth drivers.

Population growth

The VIC capital currently has the fastest-growing population across Australia, and together with Sydney, it represents 40 per cent of the country’s total population.

From 2016 to 2017, the population in Melbourne grew more than five times higher than the national growth rate—that is, 11,953 people or 8.1 per cent. WyndhamWyndham, WAWyndham, NSW, Cardinia, Melton, Whittlesea, Casey and Hume also boast high population.

Consumer confidence

Even if the capital city's property market is currently seeing high prices and slightly unaffordable home loans, Melbourne still accounts for a high number of first-home buyers across Australia. In fact, of all capital cities, it came in third in terms of the most improved number of first-home buyer loans over the year.

New South Wales topped the first home buyer loan category for the third quarter in a row with an 80.8 per cent increase, while the Australian Capital Territory and Victoria came in second and third, with percentage rises of 80.6 per cent and 35.3 per cent, respectively.

According to the PRD nationwide’s Q3 Key Market Indicators report: “NSW, ACT and Vic are not usually known for their friendliness towards first home buyers, yet the states that are (Queensland, South Australia and Tasmania), had their number of first home buyer loans only grow by single digits.”

Overall consumer sentiment, which is currently at 10.6 points on the Australian Consumer Sentiment Index, is at its highest point since December 2013.

“This is momentous in the Australian market, particularly as we are seeing capital city house median prices, particularly Sydney and Melbourne, slowing down. This truly marks a return to a more sustainable level of property price growth in Australia, as well as a return to more confident consumers (towards economic health) because of it,” the report stated.

Strategy

While Melbourne’s economy remained stable and its property market continued to boast growth drivers, investors would do well to proceed into the capital city with caution, according to experts.

For investors who have already bought in the capital city, experts strongly advise protecting their equity by keeping a low loan-to-value ratio (LVR), from 80 per cent or below. By implementing this strategy, they reduce the risk of market fluctuations for the long term.

If buying is a top option, make sure to purchase within your means to avoid running the risk of being deep in debt when prices go down.

Right Property Group’s Victor Kumar said: “Property investment is all about finance. If you can't get the finance, you can't control the wealth. If you can’t control the wealth, you don’t have a lifestyle.”

“If finance gets hard, you need to start to look into more cash flow or stop buying for a little while. If you’re just starting to build out your portfolio, you got to start from good fundamental areas and make sure you’re aware of the amount of negative cash flow you’re going to carry since you’re in the acquisition phase.

“You shouldn’t have loans hanging around for a lifetime. You need to actively look at ways of paying it off so you can control the cash flow and control the income. In other words, look after your cash flow and the equity should happen,” he highlighted.

Ultimately, before investing in any market, do your research and engage professionals, where appropriate, in order to make the right investment decisions and minimise risks as much as possible.

Hotspots

If you're set on purchasing properties in Melbourne, look for the fundamental—infrastructure, jobs growth, population growth and affordability.

Within the capital city, the suburbs that satisfy these simple criteria are Geelong, Ballarat and Bendigo.

According to Right Property Group's Steve Waters: "Hotspots are, perhaps, areas that haven't had the attention yet, yet it has all the same characteristics as the hotspots reported in the media."

"As people wrestle with the whole affordability scenario, especially in today’s lending environment where you’ve got finance that is hard to get, they naturally start to look for these more affordable areas and we tend to try and identify those, if you're going to use the word hotspot; we try to get in there before it happens," he explained further.

Track the major market movements in Melbourne and get to know more about the capital city’s growth drivers and hotspots through Smart Property Investment’s April 2018, May 2018, June 2018 and July 2018 market updates. Visit Smart Property Investment's Property Market News page to get updates on other major capital cities.